Looking to renovate your home, purchase household items, finance your education, buy a house or a car but don’t have enough on your savings account? Then you’ll likely turn to a lender to allow you the resources to realize your goals.
But what you’ll quickly learn if you were to do a Google search is that there are at least dozens of lenders available willing to provide the financing you need—everything from mortgages to semi truck title loans. So how do you wade through this overwhelming variety of choices in order to settle on the lender and loan that’s most suitable for your need? Here are some practical tips to help you do just that.
The Shorter the Term, The Better – If You Can Afford It
A loan’s term is the period the lender gives you to pay back the loan. It determines what your repayments will be and the total amount of interest you’ll eventually pay. A longer-term loan, for example with a 30-year repayment period, would have smaller monthly repayments when compared to a shorter-term loan, e.g. with a 5-year repayment plan. The smaller repayments would exert much less strain on your present income.
However, this ‘saving’ is misleading as the person with a 30-year repayment plan could end up paying hundreds of thousands of dollars more in the end when compared to the one who went with a 5-year plan. Of course, it comes down to the amount of monthly repayment you can afford on your current income, so it’s all about striking the right balance. The golden rule of minimizing your loan costs is choosing the shortest term you can comfortably handle.
Choose the Lowest Interest Rate
Consider a loan of $200,000 with a 20-year term offered at 5% and 5.5% by two different lenders. On the face of it, it doesn’t look like there’s much difference between the two. Even the monthly repayments would have little separating them. However, by the end of the 20 years, the person who borrowed at a 5.5% interest rate will have repaid about $15,000 more than the one who obtained an identical loan but at a 5% rate.
Ergo, all other factors constant, go for the lender offering the lowest rate. Remember to compare the true interest rates of different lenders i.e. the annual percentage rate or APR. That way, you’ll be comparing like for like.
Variable versus Fixed Interest Rate
A variable interest rate rises or falls depending on market changes – e.g. when there’s a change in treasury bill interest rates. A fixed interest rate loan retains the same interest rate either throughout the loan’s tenure or for a pre-defined period. If it’s for a pre-defined period, the loan will revert to a variable rate once the period lapses if the borrower and lender do not negotiate another fixed-rate period.
The variable and fixed interest rate loans each have their merits and demerits. Variable interest rates benefit from falling market rates but are unpredictable and can quickly become expensive if market rates rise. Fixed rates allow you to budget your repayments but derive you of the gains of falling market rates.
The best rate type for your need will depend on various factors including your risk appetite, past interest rate trends, your expectation of future interest rate trends, as well as your current and projected future income.
Chances are you are not the first person that the lenders you are interested in have lent money to. Thanks to the Internet, customers today have a wide range of public platforms where they can share their experience with a particular product. Once you have zeroed in on the lenders you are interested in, go online and see what people are saying about them on Google Reviews, Facebook Reviews and other forums where users can rate and review a business.
Whereas no business will fail to drop the ball sometimes however rarely, you should keep an eye on the overarching or average sentiment. If the majority of reviews about a given lender are negative, then that’s probably not a lender you’d want to be dealing with.
Seek Advice from Your Social Circle
Reviews are quite helpful in leading you in the right direction. But sometimes, the information you need to make a decision is seated right next to you. Your social circle is a treasure trove of knowledge. And it’s better than online reviews because not only is their advice free but they also are unlikely to provide misleading information for financial gain.
Talk to your family and friends to find out which lender they would recommend. If you are lucky, they may have obtained a similar loan to the one you are looking for so you could use that as leverage to negotiate better terms for yourself.
A loan isn’t free money so your choice of lender is critical. By applying these tips, you can reduce your chances of getting sucked into a loan contract that’s detrimental to your financial health.